Friday, March 05, 2010

How to FIX America

It seems clear to me that the answer to most all US problems is to reform our banking and lending system. Unfortunately, I have not heard any one clearly explain how our current system really works. And consequently, I haven't heard many real solutions. After the Dot.com bust, the housing market was not affected because of government stimulus. This led to banks giving Mortgage-Backed Securities their AAA rating. Banks operating on deregulated fractional reserves were leveraging their accounts by trading their fractional reserve dollars for these volatile MBS derivatives. When the housing market turned, these toxic assets were worthless due to Mark-to-market rules after ENRON. Banks couldn't lend having lost their fractional reserves. This let the FED, the lender of last resort, to pick winners and losers.

Now we were told that the downturn was the fault of sub-prime loans. But this is only partly true. The truth is that the rich defaulted on their mortgages on their second homes as much as the poor did. The problem is that amortized loans collect 95% interest for 20 years on a 30 year loan. This means that, assuming minimum payments, a family can only gain equity on their home if the price of the house goes up. This force has been a major driver of inflation which has led to a constant rise in cost of living and has forced both mom and dad into the work place at the same time. With both mom and dad working, emotional needs are not met and that means more vice, drugs, overeating, emotional shopping, divorce, and illegitimacy. This lending system creates class in America. There are those that collect interest and those that pay. Then there are those that are crushed by the system and end up on social programs. The rich then turn the poor against the working and the working against the poor thus turning the attention away from them. The working envy the rich and despise and neglect the poor while the poor resent the working and praise the elite who promise the social programs paid for by the working class.

However, due to fractional reserve lending, financiers borrow tax dollars from the FED and due the money multiplier, they can lend 10$ or more for every $1 borrowed. This means there is no risk in lending at all. If a person defaults and the financiers repo your house, and they sell it for 50c/1$, the financiers made 40c/1$ plus all the interest paid, and the PMI claim. Banks make money when they repo your house. There is no risk. AIG who sells PMI on all subprime loans couldn't pay. But the US government bailed them out. The banks got their insurance claims, but still were in trouble because the MBS that the banks owned in order to leverage their deregulated fractional reserves were now worth zero. So, Bernanke proposed the 700 Billion TARP (toxic assets relief program) to buy the MBS. But the money went free to the banks and the the banks kept the MBS on top of everything.

This affects health care because 15% of health costs goes to the doctor. 15% goes to the insurance. The rest is the facility fee. Most of this facility fee goes into the pocket of financiers and shareholders. If communities owned their hospitals, and hospitals were non-profits, that would save 50% on health care. Financiers claim that they deserve these profits because of the risk. But remember that for them, risk is only an illusion.

What we need to do in the US is end fractional reserve lending. With full reserve lending the US would make prime on all money created and not just on the fraction lent. Instead of 45 billion the FED makes, the US Treasury could make 10X or more that that. We need to end the FED and end all financier middlemen. Let local banks borrow directly from the US Treasury. If we switch to full reserve banking, we may be able to print 12.5 trillion dollars and pay off debt and soak up the extra dollars and prevent inflation and devaluation of the currency. The extra revenue from the 8% saved on debt interest and earning prime on all money lent, would balance the budget. Instead of mortgages with unfair amortization schedules, lending and borrowing could be done without collecting usury/interest like Sharia Law Banking and only charging a fee like local banks do anyways. With cheap money, the US must also enforce anti-trust law and prevent hostile takeovers, mergers and aquisitions. The US must support industries that make us self sufficient (like natural gas over petroleum) and use tarrifs to protect US jobs and industry.